A person managing a dry-cleaning store for $30,000 per year decides to open a dry-cleaning store. The revenues of the store during the first year of operation are $100,000 and the expenses are $35,000 for salaries, $10,000 for supplies, $8,000 for rent, $2,000 for utilities, and $5,000 for interest on a bank loan. Calculate (a) the explicit costs, (b) the implicit costs, (c) the business profit, (d) the economic profit, and (e) indicate whether the person should open the dry-cleaning store.

$60,000

$40,000

$30,000

$10,000

he can open the store

Explanation:

Explicit cost includes the amount expended in running the business. They include rent , salary and cost of raw materials

Explicit cost = $35,000 + $10,000 + $8,000 + $2,000 + $5,000 = $60,000

Implicit cost is the cost of the next best option forgone when one alternative is chosen over other alternatives. If he didn't open the dry cleaning stores he could be earning $30,000 as a manager. $30,000 is his implicit cost

Accounting profit or business profit = total revenue - explicit cost

$100,000 - $60,000 = $40,000

Economic profit = accounting profit - implicit cost

$40,000 - $30,000 = $10,000

Since his economic and accounting profit are positive, he can open the store

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